An Overview of the Sarbanes-Oxley Act of 2002

About Sarbanes-Oxley Act

The Sarbanes—Oxley Act of 2002 was passed on July 30, 2002 and only the public companies are now feeling its impact. This act frequently called the “most significant accounting or auditing legislation since the securities exchange Act of 1934”. After the implementation it has established its demands to the companies for proper management and disclosure of risk.

There have been found a number of corporate financial scandals (e.g. Enron Accounting Scandal) that provides various type of weakness in the governance and auditing practice in the organization. It represents the failures in controlling the reliability and integrity to the stock markets. The scandals cost billions of dollars for the investors when the affected companies were collapsed. As a result, these scandals make upset the public confidence in the nation’s security markets.

The Sarbanes—Oxley Act was passed in positive response by the American congress on July 30, 2002 in response to a number of major corporate and accounting scandals and these scandals in result of decreasing the investors or shareholders confident on investing on the share market. To restore their confident, a new regulation from SEC (Security and Exchange Commission) is implemented. The act was granted by a vote of 423-3 by the House and by the Senate 99-0. So, it can be said that the act had not to face approving challenges.

Sarbanes-Oxley Act of 2002
Former President Bush signed in to law the Sarbanes-Oxley Act of 2002 on July 30, 2002.

The Sarbanes—Oxley Act gives the government a strong control. This act is commonly known as Sox or Sarbox act and it consist of eleven titles. Each title contains different sections and setting from further corporate board tasks to criminal penalties. The Sarbanes—Oxley Act was named after senator Paul Sarbanes and Representative Michael G. Oxley. President George W. Bush signed it into law, stating it included, “the most far reaching reforms of American business practice since the time of Franklin D. Roosevelt”. The established legislation is applicable for all U.S. public company boards, management and public accounting firms. This new legislation is an enhancement to standardize the process for all US public companies; the companies will become more transparent on company board, Management and public accounting firms.

The most important provisions of  the  Sarbanes—Oxley Act include:

  • Accelerated reporting of trades by insiders.
  • Public reporting of CEO and CFO compensation and profits.
  • Auditor independence and a prohibition on audit firms offering value-added services.
  • Companies are now required to have an internal audit function, which must be certified by external auditors.
  • Certification of financial reports by CEOs and CFOs.

An Overview of the Sarbanes-Oxley Act

From a number of financial scandals the act Sarbanes Oxley has been evolved. This act provides some important and practical provisions for the public companies. There are eleven titles under the Sarbanes—Oxley Act of 2002 and these are: Public Company Accounting Oversight Board (PCAOB), Auditor independence, Corporate responsibility, Enhanced financial disclosures, Analyst conflicts of interest, Commissions resources and authority, Studies and reports, Corporate and criminal fraud accountability, White collar crime penalty enhancement, Corporate tax returns, Corporate fraud accountability. All these titles provide fifty seven sections overall.

1. Public company accounting oversight board (PCAOB)

Title one has nine section and it establishes public company accounting oversight board. This public company accounting oversight board is to provide independent oversight of public accounting firms providing audit services. It also deals with the auditors registering, defining the specific process, subject to the securities laws, and related matters. It is to ensure the public confidence in the preparation of informative, accurate and independent audit reports. The board will be termed as a body corporate, operated as a nonprofit organization.

2. Auditor independence

Title two also consists of nine sections and it establishes the independence of the auditors. This act provides a standard for the external auditors which limit the conflicts of interest. Furthermore, it also refers the approval requirements for the new auditors. Partner rotation policy, conflict interest issues, auditor reporting programs are in this boundary. According to the section 201, it is not approved to do other kind of business for the auditing companies, which are apart from with the same clients.

3. Corporate responsibility

Title three consists of eight sections and it emphasizes on the responsibility of the senior executives. The senior executives will be responsible for the accuracy and validity of corporate financial reports. It also establishes the responsibility by the corporate officers about the accuracy and completeness of the corporate financial reports. Besides this, the interaction between external auditors and corporate audit committees has been specified through this act.

There would be no improper manipulation on conduct of audits. Forfeiture of certain bonuses and profits, officer and director bars and penalties, insider trades during pension funds blackout periods, fair funds for investors, all these will be treated as the corporate responsibility. For example, according to the section 302, it is implied that the company should be responsible for approving the integrity of their company financial reports.

4. Enhanced financial disclosures

There are nine sections in the title four and it mandates the requirements for financial transactions, such as off balance transaction. In addition, pro-forma figures and stock transactions of corporate officers are described under this act. The accuracy and validity of financial reports and disclosures is dependent on the internal controls to be ensured. There is the possibility of material change in financial condition.

It enhanced conflict of interest provisions of personal loans to executives. This act provides the disclosures of transactions involving management and principal stockholders. Management assessment of internal controls, exemption, code of ethics for senior financial officers, disclosure of audit committee financial expert, enhanced review of periodic disclosures by issuers, real time issuer disclosures are the section included in this title.

5. Analyst conflicts of interest

This title consist only one section and it emphasizes on to restore the confidence of the investors in the reporting of securities analyst. This title defines the code of conduct that is applicable for the securities analyst and it emphasis the disclosure of knowable conflict of interest.

6. Commissions resources and authority

This title six consists of four sections and provides practices to recover the confidence in securities analysts. It also defines the authority of Security Exchange Commission to censure or bar securities professionals from practice. It also provides the information about which person can and cannot be barred from practicing as a broker, advisor or dealer.

7. Studies and reports

Title seven consists of five sections and enhances the conducting research to prevent the violence that may occur by the SEC registrants and auditors. Effects of consolidation of public accounting firms or role of credit rating agencies in the operation of securities market or securities violations and enforcement actions, and whether investment banks assisted and others to influence earnings and obfuscate of true financial condition are the boundary of this title.

8. Corporate and criminal fraud accountability

Title eight ‘corporate and criminal fraud accountability’ consists of seven sections and it is referred to as the “corporate and criminal fraud act of 2002”. Specific criminal penalties for fraud manipulation and destruction or alteration of financial records or other interference with investigation all these are provided by this act.

9. White collar crime penalty enhancement

Title nine “white collar crime penalty enhancement” consist of two sections and this section is also known as “white collar crime penalty enhancement act of 2002”. This section of title nine defines the criminal penalties that associated with white collar crimes and conspiracies. It provides the more reliable guidelines and specially adds failure to certify corporate financial reports as a criminal offense.

10. Corporate tax returns

Title ten “corporate tax returns” consists of only one section which states that the chief executive officer should sign the company tax return.

11. Corporate fraud accountability

Title eleven “corporate fraud accountability” consists of sevens sections. According to the section 1101 it has been recommended that this title can be named as “corporate fraud accountability act of 2002”. This act is to find out the corporate fraud and records which could temper the criminal offenses. It identifies these offenses and joins those offenses to specific penalties. This not only provides this description but also revises sentencing guidelines and strengthens their penalties.

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